Real Corporate Tax Reform: Still a Long Way Off

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Business leaders hungering for rate-lowering corporate tax reform often point to the United Kingdom as the poster child. In 2010 the newly-elected government of Prime Minister David Cameron lowered the corporate tax rate to 24 percent from 28 percent.

But there was a catch. The Conservative government simultaneously raised income taxes on high earners from 40 to 50 percent (since lowered to 45 percent) and raised consumption taxes through its existing value-added tax from 17.5 to 20 percent. The twin moves, part of an overall deficit reduction plan, more than made up for the lost revenue.

And that major difference – Great Britain’s cultural willingness to raise new revenue from personal income and sales taxes – will make importing the British model of corporate tax reform a remote possibility, a panel of experts speaking at the American Enterprise Institute said Thursday. In fact, raising taxes on individuals to help lower corporate taxes was barely noticed by the British public, which was far more concerned about the budget cuts that accompanied the plan, the Cameron government’s highest ranking tax official said.

“The focus was on the speed of deficit reduction,” David Gauke, the Exchequer Secretary of the Treasury, said. “There were far more controversial things I had to deal with than cutting the corporate tax.”

Those budget cuts remain controversial. Major public sector layoffs and service cuts have undercut the original claims by the business community and the Cameron government that corporate tax reform would spur economic growth and create jobs. Economists like New York Times columnist Paul Krugman have repeatedly castigated the UK’s austerity program for turning the nascent recovery of 2010 has turned into a double-dip recession.

The UK economy has declined the past three quarters. Unemployment is now 8.1 percent and rising again while output is still four percent below its pre-recession peak.

Yet the British experience hasn’t soured U.S. corporate lobbyists from launching a full-scale push to make corporate tax reform part of any plan to lower U.S. deficits. The RATE Coalition, made up mostly of Fortune 500 corporations, has launched a new public relations push comparing the U.S. corporate tax rate of 35 percent to the other members of the Organization for Economic Cooperation and Development. They led off the campaign by comparing the U.S. to Sweden’s 26.5 percent top corporate rate.

“Many countries are open, aggressively and unapologetically using tax policy to attract highly mobile capital in our highly competitive global marketplace,” said John Samuels, vice president for tax policy at General Electric and chairman of the Independent Tax Policy Forum, a non-lobbying research group backed by 45 multinational corporations.

While the corporate U.S. tax rate is one of the highest in the advanced industrial world, it is only paid by companies with few depreciable assets and few or no overseas operations. The tax breaks and exemptions in the corporate tax code allow many highly profitable U.S. based companies to pay federal taxes at much lower rates.

According to a company press release, GE’s global tax rate was 29 percent in 2011, up from 7 percent in the year before. GE paid $2.9 billion in income taxes to the IRS and its foreign counterparts. The release said the company paid more than $1 billion in other state, local and federal taxes in the U.S.

Both presidential contenders support corporate tax reform. President Obama would like to see the rate lowered to 28 percent. Republican challenger Mitt Romney has called for a 24 percent rate – the same as Great Britain (whose rate is slated to go down to 22 percent next year). Both say the tax cut could be made revenue neutral by eliminating loopholes in the code.

But experts say such promises avoid the basic math. “If you limit yourself to (eliminating) tax expenditures, the lowest possible (revenue neutral) rate is 31 percent,” said Stephen Shay, who was in charge of international tax policy at the Treasury Department before joining the faculty at Harvard Law School. “And most of that reduction would come from removing accelerated depreciation (which mostly benefits capital intensive businesses like manufacturers). Is that a good idea?” he asked.

Some academic experts dismiss concerns that corporate reform will benefit some companies more than others and would hurt manufacturers. “There are much more effective ways to raise revenue that create fewer distortions,” said James Hines, a professor of law, economics and business at the University of Michigan. He backed sharply scaling back the corporate income tax in favor of higher income and consumption taxes, including introducing a VAT (Value Added Tax) to the U.S. “If tax progressivity is what you want, you have the personal income tax that can be designed to be more progressive,” he said.

Shay suggested either a new VAT or a carbon tax, which would do double duty by helping to curb greenhouse emissions. But he held out little hope for either. “Whether it’s a new VAT or a carbon tax, people in this town don’t consider that feasible.”

Ironically, the one speaker upbeat about the possibility of corporate tax reform has close ties to organized labor. Former Congressman Dick Gephardt, now president of his own lobbying shop, said “the goal should be deficit reduction and tax reform as part of reaching for more growth and job creation. There is the possibility that a VAT could be part of the solution as long as it’s part of an argument about jobs.”

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the <em>Chicago Tribune</em> and other publications. He is the author of the 2004 book, T<em>he $800 Million Pill: The Truth Behind the Cost of New Drugs</em>.